View from the markets: Asia may not follow US rate hikes

Asia is unlikely to enter a broad-based rate-hiking cycle unless US tightening causes large and persistent currency depreciation across the region.

• The Federal Reserve raised rates in September, while October US headline CPI rose 0.4% month on month against a 0.3% consensus and core CPI rose 0.3% against 0.2% expected.
• High energy prices and tight diesel markets remain important inflation risks because diesel is widely used in transport, manufacturing and farming.
• Asian central banks pursue wider policy targets than the Fed, including exchange rates, economic growth, bond yields and headline inflation.
• Most Asian economies outside Indonesia and the Philippines have large current-account surpluses, which support their currencies and reduce the need to match US rate increases.
• After nine months of high oil prices, core inflation has stayed close to or below target in most Asian economies, with Vietnam and the Philippines as notable exceptions; subsidies have helped contain the pass-through.

Takeaway: A hawkish Fed creates a tightening bias in Asia, while widespread rate hikes would require sustained currency depreciation or a longer oil shock that forces governments to remove fuel subsidies.